Futures market CME Group contemplates brokerage, drawing inspiration from its cryptocurrency rival FTX

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Last Updated on October 2, 2022 by Bitfinsider

The cryptocurrency exchange FTX’s proposal to eliminate middlemen in the futures markets was questioned by CME Group Inc. Now, the dominant Chicago exchange is moving in the same direction.

To register a Futures Commission Merchant (FCM), a brokerage that would let investors buy and sell futures on CME’s market—CME submitted the necessary papers in August. Investors could avoid using current brokers and connect directly to the exchange operator for futures trades if the application is approved and CME enters the brokerage market.

Investors who pay fees to trade futures may benefit financially from the decision, but if CME undercuts them on fees, it’s likely to draw criticism from other FCMs who stand to lose money. For Wall Street banks, where FCM divisions are a crucial component of their prime-brokerage arms, as well as for specialized companies like Advantage Futures and R.J. O’Brien & Associates LLC, clearing futures deals is major business.

FCMs are essential to the futures market. Futures contracts enable traders to wager on the upward or downward movement of markets like oil, wheat, and the S&P 500. Futures traders must post cash collateral, often known as margin, to an FCM in order to purchase or sell futures. If the trader’s bet wins, the FCM adds more money to his or her account; if the trader loses, the FCM requires more margin from the trader. A large trader’s default could result in losses for an FCM.

After attacking a similar idea from FTX, the rapidly expanding cryptocurrency exchange run by 30-year-old billionaire Sam Bankman-Fried, CME made its move.

Earlier this year, FTX suggested allowing traders to post margin directly to its American bitcoin futures market without using an FCM. Financial powerhouses lobbied for and against the idea in Washington, sparking a fierce debate. Terrence Duffy, the CEO of CME, stated at a congressional hearing in May that the FTX proposal “would significantly increase market risk,” while Mr. Bankman-Fried defended the proposal as a much-needed update to the infrastructure supporting futures markets.

The Commodity Futures Trading Commission is debating whether to accept FTX’s plan and may make a choice soon.

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